HB 1776, The Property Tax Independence Act

A solution that makes sense for Pennsylvania

INTRODUCTION

There is no "Holy Grail" of property tax reform. Any property tax reform measure will involve shifting the tax levy from one type of tax to another – there is no free ride. But there are ways to fund our schools and to ensure a better education for our children that are fairer and more effective than property taxes.

Many Pennsylvanians lose their homes and a lifetime's work to sheriff's sales each year because they no longer can afford to pay their property taxes. Senior citizens on fixed incomes are increasingly forced to sell their homes because of unrelenting increases in their tax burden. Young families cannot afford to purchase a home because the per-month property tax escrow is simply too high. Multi-generational family farms are being sold piece by piece to pay property taxes, devastating Pennsylvania's agricultural industry. School districts in areas of the state with limited population and no commercial tax base are in distress and are unable to afford to give their children a quality education. Job losses, outmigration, and abysmal state economic performance caused by burdensome property taxes are devastating Pennsylvania's economy.

A sensible, broad-based, statewide and state-administered property tax replacement funding source is needed to eliminate an antiquated and regressive property tax system, to end these educational inequities, to return home ownership to the homeowner instead of allowing the government to effectively own our homes, and to restore Pennsylvania's economic vitality.

THE BOTTOM LINE: Our current system of school funding is crumbling. This decay has been occurring for many years and continues to escalate. Home foreclosures and tax sales are occurring at an expanding rate and the home market is at a standstill. The opportunity to fund education from statewide sources is rapidly vanishing as relentlessly rising property taxes outpace available revenue. This will have major implications for school districts statewide. It can no longer be ignored or diminished. Replacement of the school property tax must be accomplished now.

THE PLAN AND HOW IT IS FUNDED

After many months of work and negotiation by key legislators, a plan to eliminate and replace school property taxes has been finalized and has been formally introduced in both the Pennsylvania House of Representatives and Senate.

House Bill 1776, the Property Tax Independence Act, looks in part to the former School Property Tax Elimination Act (SPTEA) for its basic structure. While the Property Tax Independence Act mirrors some of the provisions of the former SPTEA, the plan has been comprehensively rewritten to account for lawmakers' concerns and preferences in order to eliminate objections common to the previous legislation.

As with the former SPTEA, the Property Tax Independence Act will eliminate all school property taxes across the Commonwealth and will replace those taxes with funding from statewide sources.

The most important provision of the Property Tax Independence Act is that it is tax revenue neutral. To provide absolute fairness, the legislation has been carefully crafted to ensure that the tax swap provision of the plan does not raise one dollar more than is already collected by the school property tax mechanism.

The Property Tax Independence Act uses a modernized school funding plan based on 21st century economic realities.

The sales tax is also the most desirable revenue source because, unlike the property tax that has no relationship to family income, the sales tax is tied directly to a person's ability to pay.

While the sales tax is the Property Tax Independence Act's primary revenue source, small increases in other taxes are blended into the total to spread the cost of education over the broadest possible base.

To decrease the total revenue needed for property tax elimination, the proposed North Dakota property tax elimination plan was used as a model. At enactment of the Property Tax Independence Act, all existing long-term debt will remain with each school district for them to individually service. Because of this, a remnant of property taxes will remain past the two-year elimination phase-in but ONLY the amount of property tax necessary to meet current annual debt service will remain. When that existing debt is retired, the final bit of property tax will disappear and no further property taxes will be allowed.

After enactment of the Property Tax Independence Act, each school district will be required to report the amount of property tax necessary for annual debt service and will not be allowed to increase that amount or add any new debt financed by property taxes.

The average debt service for all districts is 10 percent of their annual budget, with the highest district at 18 percent. This means that, at worst, one or more districts will enjoy an 82 percent reduction of property taxes at the end of the second year of the plan, with an average property tax reduction statewide of 90 percent. This will tremendously reduce the burden on property owners until the long term debt is retired.

As mentioned above, total elimination of the property tax in every school district will be achieved when its debt is retired, although that will vary by district depending on the length of the remaining debt term. Fifteen Pennsylvania school districts are carrying no long-term debt and will see their property taxes totally eliminated immediately at the end of the two-year phase-in period.

Note that none of these funding sources are particularly burdensome by themselves but, taken together, provide the funds necessary to replace Pennsylvania school property taxes. Further, the Property Tax Independence Act will more equally distribute the cost of school funding across all of Pennsylvania's population and visitors to the state, rather than just depending on taxing homeowners.

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